MILEAGE ALLOWANCE FOR TRANSPORTATION PAID BY EMPLOYERS TO EMPLOYEES FOR 1988 IS EXPLAINED BY IRS.

ISSUE

The purpose of this revenue ruling is to modify Rev. Rul. 80-62, 1980-1 C.B. 63, as modified by Rev. Rul. 80-203, 1980-2 C.B. 101, Rev. Rul. 84-51, 1984-1 C.B. 90, Rev. Rul. 85-155, 1985-2 C.B. 89, and Rev. Rul. 87-93, 1987-2 C.B. 81, with respect to the rules for the substantiation of expenditures for ordinary and necessary expenses of transportation whether or not traveling away from home that most nearly represent present reasonable limits in light of current costs.

LAW, ANALYSIS, AND HOLDING

Section 274(d) of the Internal Revenue Code and section 1.274-5T of the Income Tax Regulations provide rules for the substantiation of business expenditures for travel, and for reimbursement arrangements or per diem allowances for ordinary and necessary expenses of an employee traveling away from home (exclusive of transportation costs to and from destination), and mileage allowances for ordinary and necessary expenses of an employee's local travel and transportation while traveling away from home. Under the authority granted to the Commissioner by section 1.274-5T(g) of the regulations, such arrangements or allowances that are in accordance with reasonable business practices may be regarded (1) as equivalent to substantiation by adequate records or other sufficient evidence of the amount of such traveling expenses for purposes of section 1.274- 5T(c), and (2) as satisfying the requirements of an adequate accounting to an employer with respect to such amounts for purposes of section 1.274-5T(f).

A fixed mileage allowance used by an employer to pay an employee's ordinary and necessary expenses of local travel or transportation while traveling away from home shall be deemed to satisfy the substantiation requirements of section 1.274-5T(c) of the regulations and the adequate accounting requirements of section 1.274-5T(f) if (1) such allowance does not exceed 24 cents per mile, and (2) the elements of time, place, and business purpose of the travel or transportation are substantiated in accordance with paragraphs (b)(2) (travel away from home), (b)(6) (listed property which includes passenger automobiles and any other property used as a means of transportation), and (c) (other than subparagraph (2)(iii)(A) thereof) of section 1.274-5T.

In addition, an employer may grant an allowance for parking fees and tolls attributable to the local travel and away-from-home transportation expenses as separate items.

Pursuant to section 1.274-5T(f)(2) of the regulations, if an employee, under a travel or transportation expense arrangement or allowance practice that satisfies the criteria described in the preceding paragraph, receives an amount from an employer equal to the deductible local travel or away-from-home transportation expenses, the employee need not report such reimbursement amount in gross income.

If an employee, under a travel or transportation expense arrangement or allowance practice discussed above, receives an amount from an employer in excess of the deductible local travel or transportation expenses, the employee must report such excess amount in gross income.

If an employee, under a travel or transportation expense arrangement or allowance practice discussed above, receives an amount from an employer less than the deductible local travel or away-from- home transportation expenses and the employee wants to claim a deduction for such excess expenses, the employee must report the entire reimbursement amount in gross income and claim a deduction for all the ordinary and necessary local travel and away-from-home transportation expenses.

The provisions of this revenue ruling relating to reimbursement arrangements will not apply in any case in which an employer and an employee are related within the meaning of section 267(b) of the Code, but for this purpose the percentage of ownership interest referred to in section 267(b)(2) shall be 10 percent.

EFFECT ON OTHER REVENUE RULINGS

This revenue ruling further modifies Rev. Rul. 80-62 with respect to expenses for local travel and away-from-home transportation paid or incurred after December 31, 1987.

DRAFTING INFORMATION

The principal author of this revenue ruling is Morton Meretsky of the Office of Assistant Chief Counsel, Income Tax and Accounting. For further information regarding this revenue ruling contact Mr. Meretsky on (202) 566-3637 (not a toll-free call).